By Roger Raven
Farmers, the National Farmers' Federation (NFF) and other farmer bureaucracies have spent the past 20 years resolutely promoting economic rationalism, which they saw as the gateway to financial salvation. What they so enthusiastically embraced was a particularly poisonous ideology that is ruining them wholesale in an impressive number of ways.
Farmers are increasingly aware of the extent to which they are simply the doormats for the ambitions of rural politicians. They are learning that it is not only trade unions that are run by traitors.
Older farmers' memories of the devastation of the 1930s Depression and World War II ensured strong support for statutory marketing authorities for rural products for 50 years afterwards. The first Australian Wool Board was formed in 1936. It levied growers to fund wool R&D and promotion.
The second Central Wool Committee was formed in 1939 with the same aims. At this time, Australia had 90 wool textile mills, employing 19,600 people and consuming about 7% of Australia's wool production.
In 1945 the Australian Wool Realisation Commission was given the task of disposing of 10.4 million bales that had accumulated. Although the task was expected to take 13 years, buoyant post-war demand had consumed the lot by July 1951. The scheme involved a reserve price: the commission bought any wool which would otherwise have been sold to another buyer for less than that minimum.
In 1951 a referendum of growers rejected introduction of a permanent reserve price scheme. US stockpiling during the Korean War had caused an unsurpassed boom in wool prices and growers decided to pocket the lolly rather than divert it to longer-term projects. Growers again said "no" to a reserve price scheme referendum in 1965.
The NFF was formed in 1979 with one of its commodity councils being the Wool Council of Australia (WCA). In 1987, in line with the prevailing rationalist agenda, the Labor government passed to the WCA the power to set the reserve price. The WCA increased it by 70% over the next year, to make the most of high wool prices, dismissing widespread and well-researched warnings that doing so could bankrupt the scheme.
Following a collapse in demand and the rapid growth of the AWC's stockpile, Sir William Vines was appointed to head a Committee of Review into the Wool Industry in 1990. (Vines was at the time — in company with Hugh Morgan and Rupert Murdoch — a member of the Advisory Council of the Tasman Institute, which also had New Zealand politician Roger Douglas as deputy chairman.)
The inquiry recommended the dismemberment of the AWC into the Australian Wool Corporation, the Australian Wool Realisation Commission, and the Wool R&D Corporation.
The following year, the reserve price scheme was abandoned; it had consumed $1.8 billion of AWC reserves, then $2.8 billion of taxpayer-guaranteed borrowings, and produced a 4.6 million bale stockpile. A stock reduction program destroyed 10.6 million sheep.
The end of the reserve price scheme and the fragmentation of the AWC has worsened the crisis of the industry. Some 40% of wool growers have left the industry since 1990.
Most of the blame for the collapse of the reserve price scheme can be shared between the managers of the AWC and WCA/NFF, and the growers, compounded by the political dominance of an extremist economic ideology.
Some expositions, like the Garnaut report commissioned by the minister, Simon Crean, last year, appear largely ideological in their aim and content. Others, such as a feasibility study into the downstream processing of WA wool, are more useful, but have been far less extensively reported.
Marketing
The traditional aims of statutory marketing authorities (SMAs) have been to increase growers' market power and stabilise commodity prices. In its 1991 review of statutory marketing arrangements for primary products, the Industries Commission was dismissive of examples of processors using their market power to manipulate the market.
Such manipulation is especially common (and is especially easy) where the dominant exporter is part of a foreign-owned vertically integrated organisation (four of the top 10 exporters in 1993 were Japanese trading companies), such as in the beef industry.
Government and cooperative marketing organisations have repeatedly emphasised that a single-desk seller has considerable market leverage. Trade unions learned long ago that division means death.
Economic "rationalist have a touchingly nave faith in the capacity of law and the Trade Practices Commission to prevent the creation or abuse of monopoly or oligopoly power. The TPC itself made it clear to the Martin Committee that it didn't share that optimism regarding the banking system.
Managerial inertia and mediocrity are far more widespread in the private sector than is acknowledged. As most rationalists are managers, one of the aims of rationalism is to conceal managerial incompetence.
Prices are neither good indexes of scarcity, nor good indicators of efficiency. The revaluation of the Australian dollar after February '93 and its subsequent fall flowed entirely from speculation. In neither case did the consequent changes in the relative prices for imported, domestic and exported goods have anything to do with any economic fundamentals.
State intervention is needed because the low returns being earned by many farmers are a fundamental barrier to land rehabilitation and the economic and social stability of rural areas.
The latest lost cause being pushed by the NFF for want of something useful goes under the name of New Horizons. One aspect of it is to have farmers invest in the more profitable segments of agribusiness — the "downstream processing" / "value-adding" so essential to the rhetoric of the contemporary politician.
The result of the first attempt was immensely amusing. In 1993, Fosters Brewing Group Ltd sought to sell off its rural services division, Elders Australia Ltd. The NFF organised that a Farmers' Investment Trust could buy 15-30% of Elders, depending on the amount of money that farmers subscribed.
What happened was that farmers subscribed very little money. To avoid the humiliation of having to return it all, the FIT touched Perth businessman Alan Newman of Futuris for the balance of the 15%, in return for selling Futuris the other 15%. A fund set up "to provide greater farmer influence over downstream processing marketing and distribution of farm produce" become the doormat through which Futuris obtained control of Elders.
A new AWC is needed that will have to overcome the inevitable tensions between producer, manufacturer and retailer. Its role will be to ensure that growers get a stable price, and that dividends come to make up a considerable fraction of farmers' incomes; that processors get a product of above average consistency and quality; and that promotion, R&D and other important service functions are carried out as effectively as possible.
The greatest advantage a government business has over its private sector analogue is that it has a simple purpose: to do the job well. Private sector outfits are there to make money, even if what is profitable achieves only a fraction of the potential of the industry.
Compulsory acquisition, reserve pricing, production quotas and cross-subsidies are necessary if the new structure is to meet social objectives (such as keeping all but the worst wool growers in business) as well as that of narrow commercial profitability.
Borrowings could be raised from the usual sources. However, the state-owned Rural & Industries Bank of WA should have a much more prominent role in development capital, rather than somewhat sterile investments in housing and business loans and securities.
R&D to improve wool products, and processing technology, is essential. International wool promotion is a public good that, in economic jargon, has a free rider problem. Promotion largely benefits the foreign-owned textile manufacturers and design houses, since it is at these stages that most of the value is added. It benefits the Australian wool grower only in that the demand for apparel wool is increased.
Manufacturing hasn't generally been a significant role of SMAs. However, further processing and marketing must become a more important role than price stabilisation.
Most wool fibre processing operations in Australia are foreign-owned, with further processing in other countries. Some involve substantial taxpayer subsidies of what are or may become foreign-owned operations.
The new AWC would enter the later-stage processing and retailing fields initially by joint ventures and takeovers, and later by direct investment in Australia and overseas.